Flatliners: Ideology and Rational Learning in the Diffusion of the Flat Tax

Kim & Varsano, 2006). Though there are unfortunately no reliable data on effective
tax collection, we can account for the attractiveness of neighboring countries through
their success in drawing in international capital. Multinational corporations hoping to
take advantage of the region’s high levels of education and relatively cheap labor might
be further swayed by favorable tax regimes.¹⁹ Therefore, competition for foreign direct
investment as well as for mobile capital may well be influential in a government’s decision
to adopt the flat tax.

Thus, we can set up a hypothesis for diffusion:

• H₄ : The presence of diffusion would increase the probability of flat tax adoption,
through policymakers’ rational observance of the increasing attractiveness of flat-
tax countries.

Another schematic for thinking about diffusion is that countries would adopt a reform
either because of pressure from powerful actors (the IMF, World Bank, or European
Union)²⁰ This seems not to apply in the case under study here. As mentioned, the
IMF explicitly opposed Estonia’s adoption of the flat tax. In terms of other sources of
external pressure, with the Central European and Baltic countries already in the EU,
after a decade of reform and negotiation, and many in the Balkans poised to formally
begin talks with Brussels, EU accession has been one of the driving sources of reform in
the region over the past 15 years. But whatever else in Western Europe was attractive,
the social welfare states and attendant high taxation were certainly not what that the
postcommunist countries strove to emulate. Even though nearly all the countries in the
region were oriented toward EU accession, the flat-tax reform was not a component of
¹⁹ This would be reflected more strongly in corporate taxation levels, but individual taxation regimes
serve as a feasible proxy.

²⁰For illustration, see Stallings (1992), Simmons (2001), or Henisz, Zellner and Guillen (2005).

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